Schedule C Tax Deductions - "D" is For "Don't Do Depreciation"

Do your eyes glaze over at the thought of those mind-numbing depreciation rules? Well, take heart, sole proprietor. Thanks to a tax law known as Section 179, you can probably kiss those depreciation rules good-bye.

Depreciation is the name we use for deducting the cost of business assets such as office equipment and furniture (computers, printers, fax machines, copiers, desks, bookcases, etc) and other items that the tax code says have a "useful life" of more than one year.

The general rule for many decades was this: the cost of such business assets (aka fixed assets, capital assets, depreciable assets) cannot be fully deducted in the year of purchase. Instead, the purchase price must be deducted over several years (anywhere from 3 years to 39 years), depending on the type of asset.

Then along came Section 179, which simply says that the total cost of certain business assets can be fully deducted in the year of purchase. There are several important conditions that must be met to take advantage of Section 179, but for the most part, sole proprietors who purchase things like the office equipment and furniture listed above can simply forget about depreciation and deduct 100% of the purchase price.

Some of those conditions include rules such as:
1) Only personal property can be deducted via Section 179. Real estate (buildings and building improvements) does not qualify.
2) For 2008, the maximum amount of the Section 179 deduction is $250,000.
3) If you purchase more than $800,000 of Section 179-type assets, you may have to reduce the amount of your Section 179 deduction.
4) When it comes to deprecation and/or Section 179, vehicles have their own set of special rules.

These special rules can be tricky, so if you have any questions about qualifying for Section 179, be sure to consult with a tax professional or check out IRS Publication 946, How To Depreciate Property.

So, if the only business assets you purchase were things like office equipment, and you purchased less than $250,000 of those type of assets, you can deduct the full cost and ignore the depreciation rules. And you've just simplified your tax return considerably, because you don't have to wade through all the possible methods of depreciation and keep track of those calculations for several years.

Schedule C filers report the Section 179 on Line 13, Depreciation and section 179 expense deduction. But you must also complete Form 4562, Depreciation and Amortization to report the details on the business assets that qualify for the Section 179 deduction. Part I of Form 4562 is devoted to the Section 179 deduction, so be sure to read up on how to complete this part of the form. The total Section 179 deduction is then transferred from Form 4562 to Schedule C, Line 13.